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On December 18, 2025, President Trump signed an Executive Order (the Order) directing the U.S. Attorney General to expedite the rescheduling of cannabis from Schedule I to Schedule III under the Controlled Substances Act (the CSA).
Under the CSA, Schedule I controlled substances are defined as having no currently accepted medical use and a high potential for abuse, serving as the most restrictive category of drugs. Conversely, Schedule III controlled substances are defined as having a lower potential for abuse and currently accepted medical uses.
Rescheduling will not immediately become effective as a result of the Order, nor will cannabis be legalized at a U.S. federal level. However, the Order does mark a significant shift in U.S. federal policy.
The Expedited Rulemaking Process
The Order instructs the U.S. Attorney General to complete the rulemaking process in the "most expeditious manner" in accordance with U.S. federal law, including 21 U.S.C. 811. The process of rescheduling engages both the U.S. Drug Enforcement Agency (DEA) and the U.S. Department of Health and Human Services (HHS), who co-assist in governing the process. In 2022, President Biden instructed the DEA and HHS to commence rescheduling, but the process had stalled over the past few years. The Order functions as the first movement on rescheduling since early 2025.
Exemptions: A Relief for the Industry
The most tangible and immediate benefit of moving cannabis to Schedule III of the CSA is the cessation of Section 280E of the U.S. Internal Revenue Code (Section 280E). Under Section 280E, businesses trafficking in Schedule I or II controlled substances are generally prohibited from deducting ordinary business expenses. As a result, state-legal cannabis operators functioned at a financial disadvantage, being subject to higher effective tax rates.
Once effective, the change to Schedule III will remove the statutory trigger for Section 280E tax treatment and cannabis operators will be permitted to deduct these expenses from their U.S. federal taxable income. As a result, cannabis operators will likely decrease their current tax liabilities and improve their financial viability. However, it remains to be seen how the U.S. federal government will address the vast number of cannabis operators with significant tax liabilities outstanding for failure to pay U.S. federal income taxes as a result of Section 280E.
Broadened Opportunities
Rescheduling is likely to reduce regulatory risk associated with U.S. cannabis operations. Historically, the risk associated with being a Schedule I controlled substance made institutional financing difficult, resulting in cannabis companies relying on expensive non-traditional debt and dilutive equity raises. The shift may enable banks, payment processors, and issuers to enter the industry with greater confidence, but it is impossible to predict the impact rescheduling will have on these organizations.
Nonetheless, the effect of removing Section 280E will help cannabis operators improve cash flows, balance sheets, and valuation frameworks. As a result, cannabis operators may be better positioned as strategic acquisitions and improve the M&A landscape more broadly.
Next Steps
Rescheduling alone does not immediately invite institutional capital into the industry, nor ensure listing of companies on major stock exchanges, such as the Toronto Stock Exchange, the New York Stock Exchange or NASDAQ. The industry requires further U.S. federal reforms; however, with normalized tax treatment and improved cash flows, cannabis operators are going to be able to operate more akin to those in the healthcare category and enable future opportunity.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
